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Can Insurable Interest and Assignment in a Life Policy Coexist?

Abstract
The issues paper 4 of Law Commission suggests that insurable interest and assignment cannot
coexist. Nonetheless, they recommended to keep the requirement of insurable interest for a valid
life policy along with the possibility of assignment. This approach drains out the necessity of
insurable interest and also allows violation of Article 2 of European Convention on Human
Rights. This essay suggests an approach that may allow their coexistence reducing the chance of
gambling by a stranger on another’s life. The violation of the Article can also be averted
following this suggested approach.

Introduction
The Law Commission in Issues Paper 4 identified that assignment of a life policy is used to side-
step section 1 of Life Assurance Act 1774 that requires the existence of insurable interest. In
their view, it is a common practice “for a cohabitant to take out an own-life policy with the
intention of immediately assigning it to his or her partner,” whereas the Act “prevents cohabiting
partners from effecting valid policies on each other’s lives.”1 They also commented that “the
Life Assurance Act 1774 no longer reduces moral hazard or gambling in the guise of insurance”
following the ease of assignment for most policies.2 In this Issues Paper, the Law Commission
posed a question whether there is a need to reform the law to cover the situation when a policy is
assigned.3 In response to their question, the consultees unanimously rejected the need for any
reform.4 The Law Commission also considered withdrawing the requirement of insurable interest
following Australian example. They stepped back from that approach considering the fear of
people having an insurance policy on their life, by a stranger, without their consent with the
intention of moral hazard. Consequently, the Law Commission have taken the approach in

* Cutoff date of this article is 23/01/2017


1
The Law Commission and the Scottish Law Commission, Insurable Interest, (issues paper 4, (2008) [3.51, 4.13].
2
Ibid [3.51, 4.14].
3
Ibid [7.95].
4
The Law Commission and the Scottish Law Commission, Insurance Contract Law: Post Contract Duties and
Other Issues (Consultation Paper No 201, Discussion Paper No 152, 2011) [13.64].

1
favour of keeping them both for a life policy5, while, according to their view, they cannot
coexist. This essay will find a solution for overcoming this deadlock situation.

Brief Explanation of Insurable Interest


The Preamble of the 1774 Act states that a policy on life wherein the assured does not have any
interest introduces a mischievous kind of gaming. Following such ideology, the Parliament
enacted the 1774 Act and made a policy void in the absence of insurable interest. 6 Consequently,
the concept of insurable interest is based on the prevention of gambling in the guise of insurance
and reducing moral hazard.7 However, the Act does not define insurable interest. The court in
Feasey v Sun Life Assurance Co of Canada8 provided clear guidelines as to how to determine the
existence of valid insurable interest. The court suggested asking four questions to find a valid
insurable interest9,
a) “[W]hat on the true construction of the policy is the subject matter of the insurance?”
b) “Is there an insurable interest which is embraced within that subject matter?”
c) “Is the insurable interest capable of valuation in money terms at the date of the contract?”
d) Under s.3, “whether the sum payable under the policy is greater than the value of the
pecuniary interest valued as of the date of the policy.”

The first question deals with the basic issue and as such does not require further analysis. The
other three questions, and particularly the second question need further analysis as the Act does
not define which categories of interest should be insurable. Waller LJ referred to different
authorities that recognise an essential condition for a valid insurable interest, which is “the
assured’s pecuniary interest in the subject-matter of the insurance arising from a relationship
which is recognised in law”.10 “A mere expectancy or hope of future pecuniary benefit from the
prolongation of the life insured or of the fulfillment by him of moral obligations owed to the

5
At this stage, they have published a Draft Bill to bring change in insurable interest.
6
See section 1 of Life Assurance Act 1774.
7
See, Jonathan Gilman, Robert M Merkin, Claire Blanchard and Mark Templeman, Arnould’s Law of Marine
Insurance and Average (18th Edn, Sweet & Maxwell, 2016) 11-05 – 11-06.
8
[2003] EWCA Civ 885.
9
Ibid [98] (Waller LJ).
10
Nicholas Legh-Jones QC, John Birds and David Owen (eds), Macgillivray on Insurance Law (11th edn, Sweet &
Maxwell 2008) 9, para 1-13.

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assured, are insufficient to sustain insurable interest.”11 Consequently, in the absence of legal
obligation on the assured to spend money for the life insured, no pecuniary interest was found
between the relationship of parent and child in Halford v Kymer12 and in Harse v Pearl Life
Assurance Co Ltd13

The answer to the third question can be found in the decision of Dalby v India and London Life-
Assurance Co14. In this leading case, the court held that the insurable interest in a life policy
must exist only on the day of taking policy. The court established the concept that life insurance
is an insurance of a set of money to be paid at the death of the life insured in consideration of the
due payment of certain annual premiums paid during the term even if the condition as to
advantage, safety or other quality does not continue after creation of the policy or none of them
exists at the time of his death.

The decision in Hebdon v West15 explains the fourth point. In this case, the assured took two
policies with two insurance companies for the amounts of £5,000 and £2,500. Whereas, his
interest at the day of taking policies was £3,000. He recovered £5,000 from the first insurance
company and failed to recover any money from the second insurer since he had already
recovered more than his interest.

Brief Explanation of Assignment in a Life Policy


Since the life policy does not require insurable interest after the policy is issued, an insured can
easily assign his policy to anyone he likes. Due to this particular nature, it is different from a
general insurance policy. “They are chosen in action and are treated as securities for money
payable at an uncertain but future date which is bound to occur”.16 These are freely assignable
through sale or mortgage or gift. “the assignee is able to recover under it following the death of

11
Ibid 9, para 1-75.
12
(1830) 10 B & C 724.
13
[1903] 2 KB 92.
14
(1854) 15 CB 365.
15
Hebdon v West (1863) 3 B & S 579.
16
Robert Merkin, Colinvaux’s Law of Insurance (11th end, Sweet & Maxwell, 2016)19-027.

3
the life assured or the occurrence of the event specified in the policy merely on proof that he is
the assignee.”17

However, there are two requirements must be satisfied for a valid assignment. First of all, the
assured must have a valid insurance policy. Secondly, the assignment must not be used to escape
the rule in s.1 of the Life Assurance Act 1774. The section aims to stop gambling in the guise of
insurance. “To this end the courts have established the rule that a policy is void if it is taken out
by a person having insurable interest with the immediate intention of assigning the policy to a
specific person without insurable interest.”18 However, if the assured has general interest to
assign in the future or forms an intention to assign the policy to a specific person some days after
taking policy, the assignment of the policy would be valid. Such as in M‘Farlane v Royal
London Friendly Society19 the court held that a person, with good faith, can insure his own life as
many times as he likes for his benefit even though at the date of taking policy he has the
intention to assign the policies to another person. However, if ab initio the policy is intended for
the benefit of another person only, and that fact is kept back, then the policy is void under Life
Assurance Act 1774.

The Policies of Assurance Act 1867 made the assignment of life policy enforceable under law.
Section 1 of the Act says that the assignee can bring case against the insurer under his name
satisfying three conditions: 1) at the time when the action is brought the assignee must be entitled
in equity to receive the policy,20 2) the assignee must have a properly stamped assignment in
writing in the words or to the effect set out in the Schedule to the Act21 and 3) a written notice
must be given to the insurer.22 Section 136 of the Law of Property Act 1925 is also used for
assigning life policy. The only difference between these two sections of these two Acts is that
“the 1867 alone makes the equitable entitlement a condition precedent to the legal validity of the
assignment.” MacGillivray, therefore, commented that “most assignments of life insurance

17
Ibid 19-027. See, M Rothschild & Sons (CI) Ltd v Equitable Life Assurance Society [2003] Lloyd's Rep. I.R. 371
18
Ibid 19-027.
19
(1886) 2 TLR 755.
20
Section 1 of the Policies of Assurance Act 1867.
21
Section 5 of 1867 Act.
22
Section 3 of 1867 Act.

4
policies are now made not under the Policies of Assurance Act 1867 but under the Law of
Property Act 1925.”23

There must be an immediate and outright assignment of the policy. An agreement to effect a
transfer at a particular future date is not a valid assignment under 1867 Act. In Spencer v
Clarke,24 the insured deposited the policy of life insurance with A by way of equitable mortgage
to secure certain advances. A retained the policy but did not give any notice to the insurer.
Subsequently, A borrowed money from B upon the security of the same policy stating that he left
the policy at home by mistake and promised to deliver it later. B gave the company a formal
notice of assignment. The court held that the policy was not assigned to B since he had
constructive notice, because of the absence of the policy, of A's interest and as such A had
priority.

Differences between Insurable Interest and Assignment


Aforementioned analysis indicates that there are two differences between these two approaches.
One of them is legal, and the other one is practical. Currently, insurable interest is governed by
Life Assurance Act 1774.25 Assignment, on the other hand, can be made under equity or Policies
of Assurance Act 1867 or the Law of Property Act 1925. The non-existence of insurable interest
at the day of taking policy makes the policy void in order to prevent the chance of wagering in
the guise of insurance. On the other hand, existence of intention of assigning the policy to a
person without insurable interest, at the day of taking policy, may make the assignment void in
order to prevent the chance of making the policy an incentive to wagering.

The practical difference is that insurable interest ensures that the party taking the policy will
suffer loss due to the death of the life insured. On the other hand, the assignee may not have any
economic loss on the death of the life insured; instead, he may only have financial benefit
following that death. Such as in Ashley v Ashley26 A insured his life and afterwards assigned the
policy to B. B’s executors sold and assigned the policy to D and then D’s executors sold it to E.

23
Professor John Birds, Ben Lynch, Simon Milnes, MacGillivray on Insurance Law (13th edn, Sweet & Maxwell,
2015) 26-072.
24
(1878) 9 Ch. D. 137.
25
However, the Law Commission published Draft Bill to bring change in the requirement of insurable interest.
26
(1829) 3 Simons 149.

5
The question for the court was whether a valid title was passed to E. Sir L. Shadwell held that “a
purchaser for valuable consideration is entitled to stand in the place of the original assignor, so as
to bring an action in his name for the sum insured.” On the other hand, E would not have been
allowed to take a policy on A's life in the absence of insurable interest. Hence, 'assignment' made
it possible to evade the requirement of insurable interest. Moreover, the insured, i.e. the original
assignor did not have the opportunity to consent to the final assignment to E.

Can they coexist?


The above mentioned legal difference clarifies that there is no difficulty in the application of
both of these requirements in a life policy. However, the practical difference raises the issue
whether they can coexist. According to the preamble of Life Assurance Act 1774, there are two
purposes for requiring insurable interest. The first one is to prevent gambling in the guise of
insurance and the second one is to prevent moral hazard. Since a stranger is not allowed to take a
policy on a life according to his choice, the chance of gambling in the guise of insurance and
moral hazard is low. For instance, a creditor is allowed to take a policy on the life of his debtor
for the debt amount. If the borrower dies before repaying the debt amount the creditor can claim
the amount from the insurance company. If he does not die, he must pay within the stipulated
period. Consequently, the death of the debtor does not make any difference for the creditor. As
such, it is found by the law makers that requiring insurable interest at the day of taking policy
may stop both gambling in the guise of insurance and the chance of moral hazard.

However, the above-mentioned decision in Dalby v India and London Life-Assurance Co27
caused the actual difficulty. According to this ruling existence of insurable interest is not
required to have after the policy is taken. Consequently, a stranger who was initially prevented
from taking a policy on the life he chooses may become a holder of an insurance policy of that
life through assignment. For instance, if E, in the aforementioned case of Ashley v Ashley28, had
intention of gambling in the life of A in the guise of insurance or do moral hazard and gain
money, he had that chance through assignment. The Court of Appeal of Maryland, therefore, said

27
(1854) 15 CB 365.
28
(1829) 3 Simons 149.

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in Rittler v Smith29 that “the assignee of a life insurance policy, who has no insurable interest in
the life, stands in the same position as if he had originally taken out the policy for his own
benefit”. Consequently, the need of insurable interest is in jeopardy. From this point of view, the
Law Commission raised the issue whether insurable interest should continue to exist or whether
the current law of assignment should be reformed.30 From this point of view, it can be said that
the current approach of insurable interest and assignment of life policy cannot coexist.

However, they can coexist if life policy is changed to indemnity policy requiring to have
insurable interest both at the time of taking policy and the time of death. According to this
approach, the policy could not be assigned to E, in the aforementioned case, since he would not
have insurable interest at the time of death. Such approach can be found in a few states of the
USA.31 For instance, the Supreme Court of Texas held in Cheeves v. Anders, Administrator32 that
an insurance policy “cannot be beneficially owned by any one not interested in the life insured,
whether the policy be taken out in the first instance by the noninterested party, with or without
the consent of the insured, or that he acquired the policy by assignment from the person whose
life is insured, or from another who had an insurable interest.” Where the interest is in specific
characters, such as, the interest of a creditor, “the interest of the holder of such policy will be
limited to the amount of such liability at the death of the insured, together with such amount as
he has paid to preserve the policy, with interest thereon…”33

Neither Law Commission nor a court is considering to make a life policy an indemnity policy by
requiring insurable interest to have both at the time of taking policy and at the time of his death.
Moreover, making such change would reduce the chance of assignment of a life policy
hampering the investment in Traded Endowment Policies (TEPS) market. The consultees of
Issues Paper 4 of the Law Commission unanimously disagree with any approach of amending the

29
70 Md 265, 16a 890 (1889).
30
The Law Commission and the Scottish Law Commission, Insurable Interest, (issues paper 4, (2008) [7.95].
31
Alabama (Helmetag v Miller, 76 Ala 183 (1884); Indiana (Franklin L. Ins. Co. v Hazzard, 41 Ind 116 (1872));
Kansas (Missouri Valley L. Ins. Co. v. Sturges, 18 Kan 93 (1877)), Kentucky (Milliken v. Haner, 184 Ky 694, 212
SW 605 (1919)) and Texas (Manhattan L. Ins. Co. v. Cohen, (Tex Civ App) 139 Sw 51 (1911)).
32
87 Tex. 287 (Tex. 1894) at 292. See also, Griffin v. McCoach 123 F.2d 550 (5th Cir. 1941); Newton v. Hick's
Adm'r 282 Ky. 226, 138 S.W. (2d) 329 (1940) (decision of Court of Appeals of Kentucky).
33
Cheeves v. Anders, Administrator 87 Tex. 287 (Tex. 1894) at 292.

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current rules of assignment of a life policy.34 Consequently, the possibility of coexistence
through any of these processes is zero. Since they cannot coexist, it is required to find which one
is more suitable to exist.

Should Insurable Interest Exist as Opposed to Assignment?


It is stated above that insurable interest is applied to prevent gambling in the guise of insurance.
Gambling is now allowed under the Gambling Act 2005.35 The current public policy is to
regulate gambling instead of preventing it. Consequently, gambling on a life is not an issue to
prevent. It is rather an issue to prevent gambling in the guise of insurance. The Law Commission
commented that the concerned regulators are able to govern and distinguish between wager and
insurance and as such insurable interest in order to prevent gambling in the guise of insurance is
not necessary.36

It is also stated that insurable interest prevents “contracts of insurance creating incentives to
murder”.37 The possibility of assignment of a life policy to a stranger and unlimited insurable
interest in spouse's life undermine the effectiveness of insurable interest.38 The Law
Commission, therefore, commented that the existence of policy, criminal penalties and the
Proceeds of Crime Act 2002 are enough to prevent moral hazard and as such insurable interest is
not necessary to prevent “insurance becoming an incentive to murder”.39

However, it is submitted that relying on police and the Acts leaving the door open is not a wise
approach.40 The law itself asks people to take their necessary protection by imposing barriers like
the gate in the house rather than keeping the door open and expecting that police will chase the
criminals. Similarly in the case of an insurance contract the gate i.e. insurable interest should not
be withdrawn to let the ill-minded people come in and subsequently expect that the police will

34
The Law Commission and the Scottish Law Commission, Insurance Contract Law: Post Contract Duties and
Other Issues (2012) [13.64].
35
Before this Act, all forms of gambling were considered undesirable.
36
The Law Commission and the Scottish Law Commission, Insurance Contract Law: Issues Paper 4 Insurable
Interest (14 January 2008) [7.35].
37
Ibid [7.38].
38
Ibid [7.38].
39
Ibid [7.38].
40
See, The Law Reform Commission, Insurance Contracts, Report No 20 (1982) para 145.

8
chase them.41 It is worth mentioning that the Supreme of Court of Texas, in the above-mentioned
case Cheeves v. Anders, Administrator42, considered such approach as against public policy on
the ground that this creates danger by “offering an inducement to destroy human life”.

However, the only reason why the Law Commission changed their approach against insurable
interest is that the individuals “are uncomfortable at the thought that people who do not wish
them well can take out policies on their lives. Taking out an insurance policy on someone’s life
could be used as a threat.”43 However, the same threat exists when the policy is assigned to a
stranger. Consequently, the purpose of the existence of insurable interest is again lost.
Considering the aforementioned difficulties of the application of insurable interest Australia
abolished this requirement.

Australian Approach
Section 18 (2) of Insurance Contracts Act 1984 (ICA) states that a contract “is not void by reason
only that the insured did not have, at the time when the contract was entered into, an interest in
the subject-matter of the contract”. It is interesting to note that only one member of the Law
Reform Commission argued to withdraw the requirement. He said that the general law of gaming
and wagering is sufficient to ensure that the policyholder has an interest of some kind in the life
insured. Further, the criminal law, the law of negligence and other laws provide “adequate
protection against the possibility of disposal of the life insured”.44 Moreover, the payment of
premiums “provides a substantial inhibition against purely hypothetical or speculative insurance
in another’s life”.45 Furthermore, the penalty of avoidance for lack of insurable interest operates
against the insured whereas the insurer is the person who issues the policy with no insurable
interest and as such he should be punished. He further argued that “the retention of the

41
There are plenty of examples in the USA where insured murdered the life insured after the expiry of interest on
that life. For instance, in State v. Roth, 881 P.2d 268, 277 (Wash. App. 1994), D married, insured and then murdered
his second wife to get insured amount. In aff'd in part, rev'd in part, 950 F2d 931 (4th Cir. 1991), involved the
murder of an insured on a hunting trip with a friend who had taken out a life insurance policy on him. His hunting
"accident" later found to be murder.
42
87 Tex. 287 (Tex. 1894) at 293.
43
The Law Commission and the Scottish Law Commission, Insurance Contract Law: Issues Paper 4 Insurable
Interest (14 January 2008) para 7.40.
44
The Law Reform Commission, Insurance Contracts, Report No 20, (1982) para, 146. See, Kenneth Sutton,
Insurance Law in Australia (3rded, LBC Information Services, 1999) para 6.33.
45
Ibid para, 146.

9
requirement of insurable interest would simply introduce an unnecessary distinction between life
and general insurance”.46

Whereas the majority of the Law Reform Commission recommended retaining the requirement
of the interest. They considered that the main argument against the requirement of insurable
interest was that “an assignee of a policy need not possess an insurable interest in the life
insured”.47 However, they believed that the anomaly related to assignment of the policy was not
a sufficient reason for abandoning the requirement of interest.48

However, following this Act, a person can insure anyone’s life on the street, no matter if he
knows him or not. He will receive the insured money once the person dies since there is no
requirement of interest at the time of death either.49 Accordingly, “the legislature [is] apparently
being prepared to accept the risk that this situation will encourage wagering or gaming on the
lives of others”.50

Should Assignment Exist as Opposed to Insurable Interest?


The above analysis identified that assignment of a life policy creates the chance of gambling in
the guise of insurance and also makes the policy an incentive to do moral hazard. Consequently,
the threat for which the Law Commission took the approach of requiring insurable interest, that
threat exists due to the possibility of assignment to a stranger. For instance, A in the
aforementioned case Ashley v Ashley51, did not know that the policy would be sold to E who
was a stranger to A. Consequently, it is a threat to an individual thinking that a stranger is
gambling on his life and also either planning to murder or praying for his death. Nonetheless, all
consultees unanimously rejected any reform in assignment on the ground that “reform would
cause practical problems in the TEPS market, and destabilise insurance products as investment

46
Ibid para, 146. See, The Hon Michael Kirby Ac Cmg, ‘Australian Insurance Contract Law: Out of the Chaos – a
Modern, Just and Proportionate Reforming Statute’, (2011)22 ILJ 1, 16.
47
Ibid para, 145. See for instance, Patel v Windsor Life Assurance Co Ltd [2008]EWHC 76 (Comm).
48
Ibid para, 145.
49
Kenneth Sutton, Insurance Law in Australia (3rd edn, LBC Information Services, 1999) para 6.34.
50
Ibid para 6.34.
51
(1829) 3 Simons 149.

10
vehicles.”52 They also argued that “there was no evidence of social ills resulting from the
assignment of life policies”53 It is, therefore, necessary to see whether TEPS market is more
important than the alleged threat or not.

Traded Endowment Policy Market


In consequence of the decision in Dalby v India and London Life-Assurance Co54, interpreting
section 1 of Life Assurance Act 1774, sales of policies through assignment was developed. The
first public auctions of policies commenced in 1843 by Mr Marsh. Their business went into
liquidation in the 1980s and was purchased from the liquidator by Messrs Foster & Cranfield.
Until the late 1980s, the business was less attractive making a tiny amount of profit.55 From late
1980 the market radically grew56 and according to a report published in 2003, the TEPS market
was valued at around £1bn.57

In this market, the investors offer a policyholder more than the surrender value of his policy. For
instance, if a surrender value of a life policy is £20,000 an investor may offer £23,000. In return,
the investor will enjoy the benefits on death or maturity plus annual bonuses. The investor
undertakes the responsibility of paying premiums after purchasing a policy. It is found from a
survey report that 33% of policy holders, who participated in the survey, sold their policy due to
change of mortgage and 17% sold to clear their debts. 12% of them sold after their divorce and
11% needed money for their business and as such sold their policies.58 This market gives
financial benefit to the policyholders who are in a hurry to get cash and also an investor to get

52
The Law Commission and the Scottish Law Commission, Insurance Contract Law: Post Contract Duties and
Other Issues (2012) [13.64].
53
The Law Commission and the Scottish Law Commission, Insurance Contract Law: Post Contract Duties and
Other Issues (2012) [13.64]. But, ill will can be seen in the case Simpson v Norwich & Norfolk University Hospital
NHS Trust [2011] EWCA Civ 1149. In this case claimant's husband died of cancer in the defendant hospital, the
death became much more unpleasant than it should have been because he had meanwhile become infected with
MRSA. In order to take revenge, she persuaded C, a patient of that hospital, to assign his case against hospital to her
for only £1 and then continued the suit claiming £15,000.
54
(1854) 15 CB 365.
55
P. McGurk, ‘Traded Endowments’ (1998) 4(3) British Actuarial Journal 485, 487.
56
See, Maria Fleisher, ‘Stranger Originated Life Insurance: Finding A Modern Cure For An Age-Old Problem’
(2010) 41 Cumberland Law Review 569, 565.
57
‘Flood warning on the endowments market’ Independent.co.uk (Sunday 2 November 2003)
http://www.independent.co.uk/money/spend-save/flood-warning-on-the-endowments-market-5546735.html
accessed 14/1/2017. The value of this marker was $12billion in the USA in 2005, see, J. Alan Jensen and Stephan R.
Leimberg, ‘Stranger-Owned Life Insurance: A Point/Counterpoint Discussion’ (2007) 33 ACTEC Journal 110, 111.
58
P. McGurk, ‘Traded Endowments’ (1998) 4(3) British Actuarial Journal 485, 490.

11
aforementioned benefits. For instance, Karen Schneider suffered from cancer but could not
afford to pay all of her bills. Subsequently, she sold her policy for $250,000. This prevented her
from losing their house and all of their savings. Investors received $500,000 after Karen died in
2005.59 Following such good effect of the market, the responses to the Law Commissions' issues
paper 4 clarify that no one is interested in hampering this business by imposing restrictions or
amending assignment of life policy.60 The U.S. Supreme Court commented in Grigsby v.
Russell61 that the life policy became an important vehicle for investing and saving and as such
these policies should be given the ordinary characteristics of property. Consequently, the Law
Commission rejected any reform that may cause “practical problems in the TEPS market and
destabilise insurance products as investment vehicles.”62

Recommendation
It is now obvious that every possible approach has loopholes. It is therefore required to find the
less harmful but more useful approach. The above analyses clarify that the current approach of
insurable interest is ineffective in serving its purpose of preventing gambling in the guise of
insurance and also preventing to make the policy an incentive to murder. However, it gives
comfort to an individual finding that no one will use his life as a gambling instrument. This
comfort is again undermined by the fact that the policy can be continued even after the required
interest lapses63 or be sold and resold to a stranger without his knowledge and consent.64

Since existence of Traded Endowment Policy market is an important factor for an insured and
development of economy,65 the possibility of assignment should not be abolished. Consequently,
the requirement of insurable interest should be abolished since it becomes mere sham if
assignment exists. However, the threat to an individual in the guise of insurance can be stopped

59
Charles Duhigg, ‘Late in Life, Finding a Bonanza in Life Insurance’ (Dec. 17, 2006) N.Y. TIMES 1,
http://www.nytimes.com/2006/12/17/business/17life.html accessed 19/1/2017.
60
The Law Commission and the Scottish Law Commission, Insurance Contract Law: Post Contract Duties and
Other Issues (2012) [13.64].
61
222 U.S. 149 (1911) at 156.
62
The Law Commission and the Scottish Law Commission, Insurance Contract Law: Issues Paper 4 Insurable
Interest (14 January 2008) para 7.94.
63
, For instance, a divorcee may find continuance of a policy on his/her life a threat from his/her ex-spouse.
64
See, J. Alan Jensen and Stephan R. Leimberg, ‘Stranger-Owned Life Insurance: A Point/Counterpoint Discussion’
(2007) 33 ACTEC Journal 110, 117.
65
See, ibid 110, 112.

12
or reduced66 by requiring getting consent from the individual on whose life the policy is taken.
Consent should also be necessary for a valid assignment. The Law Commission on the other
hand, rejected the requirement of consent for a valid assignment on the ground that that would
affect the Traded Endowment Policy market.67 The person on whose life the policy is taken may
reject reselling of the policy or demand commission making the business difficult.

In order to require consent, it is necessary to find whether investment in the market is more
important for public than gambling in the guise of insurance and the threat of moral hazard by a
stranger assignee. Needless to say that the Law Commission considered this threat as a serious
factor and as such proposed to retain insurable interest. Such threat of moral hazard can be
considered as violation of ‘right to life’ under Article 2 of European Convention on Human
Rights. Under this Article a state has the duty to take steps towards the prevention of loss of life
at the hands of others. However, this positive duty will be imposed on a state if the risk is ‘real
and immediate’.68 The risk is considered ‘real’ if it is “objectively well-founded”.69 In Osman v
UK70 O, a teenage boy, was seriously injured and his father was killed by P. In the previous
incidence of damaging O's home P was interviewed by Police. O and his mother brought an
action of negligence against the police in respect of their investigation in P's previous activities
under violation of several Articles including Article 2. ECHR held that the positive obligation of
a state to take preventative measures to protect an individual from another would be imposed if
the state knows or ought to have known that there is a real and immediate threat. The obligation
“must be interpreted in a way which does not impose an impossible or disproportionate burden
on the authorities.”71 The court held that “it is sufficient for an applicant to show that the
authorities did not do all that could be reasonably expected of them to avoid a real and
immediate risk to life of which they have or ought to have knowledge.” This should be decided
“in the light of all the circumstances of any particular case.”

66
There are cases where policies were taken with the consent but subsequently the insured murdered or attempted to
murder the life insured. See, aff'd in part, rev'd in part, 950 F2d 931 (4th Cir. 1991); Simpson v Norwich & Norfolk
University Hospital NHS Trust [2011] EWCA Civ 1149.
67
The Law Commission and the Scottish Law Commission, Insurance Contract Law: Issues Paper 4 Insurable
Interest (14 January 2008) para 7.94.
68
Re Officer L [2007] UKHL 36.
69
See, Re Officer L [2007] UKHL 36.
70
(2000) 29 E.H.R.R. 245.
71
Ibid [116]

13
According to Issues Paper 4 of the Law Commission, the Government is well aware that taking a
policy by a stranger can be a threat to the life insured. Similarly, assigning a policy to a stranger
without the consent of that individual can also carry a threat which is against the public policy.72
It is a question whether this threat creates a real and immediate risk to life or not. According to
the view of the consultees, it does not create real and immediate risk since there is no such
previous example.73 However, Peter Nash Swisher stated a true story where a key man life
insurance policy was taken on a business partner's life. That partner left the business after
arguing with other partners. Subsequently, he was almost killed in two separate near-miss
automobile hit-and-run incidents. The family had to relocate to another city.74 It would be hard to
prove in a court that the attempt was taken by other partners to get insured money for the
business. Consequently, incidents like this never go to the court. Moreover, no one can assure an
insured that the investor will not take steps “to profit by his or her early death.”75 A stranger
assignee with evil intent will always try not to keep any evidence of the accident that may cause
death to the life insured. For instance, in Los Angeles (USA), two women in their 70s were
arrested after they allegedly befriended two homeless men, took out 19 policies and filed claims
worth $2.2 million after their mysterious death in hit-and-run. They were arrested only when one
of the women came to claim the second body and police became suspicious. 76 Consequently,
absence of previous example in the UK should not be the basis for determining the test of ‘real

72
It is stated in The American Law Register that the ‘assignment of a policy to a party not having an insurable
interest is as objectionable… [the] ‘contract is a mere wager, by which the party taking the policy is directly
interested in the early death of the assured. Such policies tend to create a desire for the event. They are, therefore,
independent of any statute on the subject, condemned as being against public policy.' see, ‘Assignment of Life
Insurance Policies' (December 1885) 753, 767.
73
The example of ill mind can be found in Ramey v. S.C. Life Ins. Co., 135 S.E.2d 362 (S.C. 1964) (American case),
where, without the insured's knowledge or consent, his wife purchased a life policy naming herself as beneficiary.
She then gave her husband arsenic in an attempt to take his life and collect proceeds of the policy.
74
Peter Nash Swisher, ‘The Insurable Interest Requirement for Life Insurance: A Critical Reassessment’ (2005) 53
Drake L. Rev 477, 528. See, J. Alan Jensen and Stephan R. Leimberg, ‘Stranger-Owned Life Insurance: A
Point/Counterpoint Discussion’ (2007) 33 ACTEC Journal 110, 114. Stephan Leimberg commented at page 114 that
‘SOLI [stranger-owned life insurance] is great proof that ethics are quickly abandoned and rationalization soon
adopted when large amounts of money are readily available. SOLI has promoted a willingness to quickly ignore or
abandon the strong warnings and harsh lessons of hundreds of cases over more than a century.’
75
See, J. Alan Jensen and Stephan R. Leimberg, ‘Stranger-Owned Life Insurance: A Point/Counterpoint Discussion’
(2007) 33 ACTEC Journal 110, 117.
76
Cara Mia Di Massa & Richard Winton, ‘2 Arrested in Homeless Life Insurance Scam’, (May 19, 2006) LOS
Angeles Times, http://articles.latimes.com/2006/may/19/local/me-homeless19?pg=2 accessed 20/1/2017; Victoria
Kim & Paul Pringle, ‘2 Women Convicted in Homeless Men's Slaying’, (Apr. 17, 2008) Los Angeles Times,
http://articles.latimes.com/2008/apr/17/local/me-olgahelen17 accessed 20/1/2017.

14
and immediate’ risk in these circumstances. Moreover, it is not a particular person who will be
affected by the approach of the state. Anyone on whose life the policy is taken can be affected by
this approach. M. Goldstein commented that “for investors, it’s a ghoulish actuarial gamble: The
quicker the death, the more profit is reaped.”77 He termed investor-initiated life policy as ‘Death
Bonds’. The academics like him consider that the assignment to a stranger itself is unethical.78
Consequently, the requirement of consent can be imposed to make the process less harmful.

If it is accepted that the threat is ‘real’, then the question is whether it is immediate or not. It
becomes immediate soon after the policy is assigned to a stranger without the knowledge and
consent of the insured. In any circumstances, if the Parliament considers that the alleged threat
does not satisfy the test under Article 2 then the Parliament should consider the issue of public
policy. It is stated above that there are academics and courts find that the assignment of a policy
to a stranger is against public policy.79

Conclusion
The Law Commission identified that a policy taken by a stranger might cause a threat to the life
insured. Consequently, they proposed, in their Draft Bill, keeping the requirement of insurable
interest but with some amendment. However, this interest is only required to be available on the
day of taking policy. As a result, an insured can gamble on the life insured after the interest
lapses. He also can assign the policy to a stranger, and the stranger can assign the policy to
another without the knowledge and consent of the life insured. Hence, the effect of the existence
of insurable interest is drained out. Consequently, the current requirement of insurable interest
and assignment cannot coexist.

77
M. Goldstein, ‘Death Bonds: Inside Wall Street's Most Macabre Investment Scheme Yet’, (July 30, 2007)
Business Week 44
78
See, J. Alan Jensen and Stephan R. Leimberg, ‘Stranger-Owned Life Insurance: A Point/Counterpoint Discussion’
(2007) 33 ACTEC Journal 110; Maria Fleisher, ‘Stranger Originated Life Insurance: Finding A Modern Cure For
An Age-Old Problem’ (2010) 41 Cumberland Law Review 569.
79
See, ‘Assignment of Life Insurance Policies’ (December 1885) The American Law Register 753; John B. Barney,
‘The requirement of insurable interest’ (1973) 8 (3) American Bar Association 509; J. Alan Jensen and Stephan R.
Leimberg, ‘Stranger-Owned Life Insurance: A Point/Counterpoint Discussion’ (2007) 33 ACTEC Journal 110;
Cheeves v. Anders, Administrator 87 Tex. 287 (Tex. 1894); Spitzer Suit Accuses Company of Abuses in Insurance
for Elderly and Ill, N.Y. Times, Oct. 27, 2006.

15
However, they can coexist if the policy is changed to an indemnity policy, i.e. the said interest
must exist at the time of death. According to this approach, the policy cannot be assigned to a
person who does not have insurable interest on the life insured. In such case, the chance of
gambling in the guise of insurance becomes very low since the gambling and moral hazard will
not give any extra benefit. Such approach can be found in a few states of the USA.

However, the Law Commission and courts are against the approach of requiring insurable
interest at the time of death. In such circumstances, either insurable interest or assignment should
remain. It is observed that the chance of assignment is necessary for Traded Endowment Policy
market which is good for both the insured and the investors. If the chance of assignment remains
then there is no need for insurable interest. In that case, gambling in the guise of insurance and
the chance of moral hazard can be reduced by requiring consent of the person on whose life the
policy is taken for a valid policy and for assignment. However, there is a good chance that the
life insured may reject the reselling of the policy or may claim commission which would affect
the market.

On the other hand, it is observed that assignment to a stranger without consent of the person on
whose life the policy is insured may cause a threat to his life. This threat can violate the right
under Article 2 of European Convention on Human Rights. Consequently, the Parliament should
take step ensuring the right to life under the convention. Alternatively, the Parliament should
consider that such assignment without consent is against the public policy.

16